New On The Horizon Hedge Accounting January 2011

IFRS
New on the Horizon:

Hedge accounting
January 2011
kpmg.com/ifrs
Contents
1. Highlights 2
2. Introduction and background 4
2.1 Overview of the IAS 39-replacement project 4
3. Overview 5
4. Objective and scope 8
4.1 Objective 8
4.2 Scope 8
5. Hedging instruments 10
5.1 Qualifying instruments and designation 10
6. Hedged items 11
6.1 Qualifying items 11
6.2 Designation of hedged items 11
7. Qualifying criteria for hedge accounting 14
7.1 Hedge effectiveness 14
7.2 Documentation 16
8. Accounting for qualifying hedges 17
8.1 Types of hedging relationships 17
8.2 Measurement of hedge ineffectiveness 18
8.3 Rebalancing the hedging relationship and
changes to the hedge ratio 18
8.4 Discontinuation of hedge accounting 21
8.5 Accounting for the time value of purchased
options 22
9. Hedges of a group of items 24
9.1 Eligibility of a group of items as the
hedged item 24
9.2 Cash ow hedges of groups of items that
constitute a net position 25
9.3 Designation of a component of a nominal
amount 25
9.4 Presentation 26
10. Disclosures 27
10.1 General 27
10.2 Risk management strategy 27
10.3 Amount, timing and uncertainty of future
cash ows 27
10.4 Effect of hedge accounting on the primary
nancial statements 28
11. Effective date and transition 30
12. Accounting alternatives to hedge accounting 31
12.1 Accounting for a contract to buy or sell a
non-nancial item as a derivative 31
12.2 Hedging credit risk using credit derivatives 31
13. Alternative view 33
14. FASB proposals and convergence 34
15. Project timeline 38
About this publication 39
New on the Horizon: Hedge accounting | 1
2011 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Closer alignment of hedge accounting and risk
management
The IASB published ED/2010/13 Hedge Accounting (the ED) in December 2010. This is the rst instalment of the nal phase to
replace the existing standard on nancial instruments, IAS 39 Financial Instruments: Recognition and Measurement. The ED
proposes signicant changes to the current general hedge accounting requirements. The proposals contained in the second
instalment, expected during the

second quarter of 2011, are intended to address portfolio or macro hedging.
We welcome this ED as a major milestone on the road to improving the nancial instruments accounting model as called for
by the G20. The changes proposed to the general hedge accounting model respond to signicant criticisms of the complexity
and burden of hedge accounting. The changes also aim to address the articial mismatch in specic scenarios between risk
management and hedge accounting strategies under the current requirements. In addition, we note the ED proposes changes
that are different from those proposed for hedge accounting under US GAAP in the FASBs comprehensive nancial instrument
accounting exposure draft published in May 2010.
The proposals in the ED alleviate some of the more operationally onerous requirements, such as the quantitative threshold
and retrospective assessment for hedge effectiveness testing. An additional proposed simplication would allow entities to
rebalance and continue certain existing hedging relationships that have fallen out of alignment instead of having to restart the
hedge in a new relationship. However, voluntarily stopping hedging relationships in certain circumstances would be prohibited.
The changes regarding non-nancial risks, which may make hedge accounting possible for some commodity components of
operating exposures such as the oil component of jet fuel purchases, will be of particular importance to entities outside the
nancial sector. Other changes that would make the use of purchased options as hedging instruments more attractive and
broaden the scope of eligible hedging instruments and hedged items will be equally important to nancial and non-nancial
entities alike.
One key issue to nancial institutions is the pending proposals on portfolio hedging as many institutions utilise this approach
in their hedge accounting strategies. Portfolio hedging is also of particular importance in Europe as it is subject to the current
carve-out in the European Union.
Although we are still waiting for the last piece of the puzzle, portfolio hedging, what we have seen so far proposes substantial
changes. These changes aim to create an approach to integrate hedge accounting more closely with risk management policies
and objectives and provide information that is more decision useful to users of nancial statements. We urge all stakeholders in
this important project to provide their feedback to the IASB by the end of the three-month consultation period.
Andrew Vials
KPMGs global IFRS Financial Instruments leader
KPMG International Standards Group
2 | New on the Horizon: Hedge accounting
1. Highlights
ED/2010/13 Hedge Accounting (the ED) proposes signicant changes to the current general hedge
accounting requirements, but also proposes to retain some of the existing guidance in IAS 39 Financial
Instruments: Recognition and Measurement. However, it does not address a key issue for nancial
institutions: portfolio hedging. These proposals are expected during the

second quarter of 2011.
This publication focuses on those requirements that would be changed and are expected to have an
impact on the preparers and users of nancial statements.
Key accounting changes proposed

Hedge accounting would be more aligned with risk management.

Non-derivative nancial instruments measured at fair value through prot or loss may be designated
as hedging instruments in hedging relationships of any risk, not only foreign currency risk.

Certain risk components of non-nancial items, certain aggregate exposures that are combinations
of exposures and derivatives, and certain layer components of dened nominal amounts would be
eligible hedged items.

Eligible hedged items also would include certain groups of items constituting gross or net positions.

The quantitative threshold and retrospective assessment for hedge effectiveness testing would be
eliminated.

Fair value hedge mechanics would be adjusted to align closer with current cash ow hedge
mechanics.

Entities may rebalance certain existing hedge relationships that have fallen out of alignment instead
of having to restart the hedge in a new relationship. However, voluntarily discontinuing certain hedge
relationships would be prohibited.

The relevant portion of the time value component of purchased options designated as hedging
instruments would be accounted for in other comprehensive income.
Key accounting changes proposed
Other considerations
System and process impacts Possible impacts to systems and processes due to:

linking of accounting and economics of derivative and hedging
transactions;

forward-looking effectiveness assessment with no arbitrary
effectiveness range;

rebalancing of a fair value hedging relationship that involves
changing the volume of a hedged item that is a nancial
instrument;

tracking the component of the separate line item in the
statement of nancial position related to individual hedged items
in fair value hedging relationships;

using basis adjustment in a hedge of a forecast transaction that
results subsequently in the recognition of a non-nancial item;
and

hedging on a net position basis.
Transaction costs and choice
of hedging instrument
Considerations around the choice of hedging instruments that
minimise ineffectiveness while adhering to risk management
policies, balanced with the appropriate market conventions and
transaction costs.
Revision of risk management
policies or hedging
strategies
Hedge accounting proposals may need to be applied at a different
level of granularity from those an entity currently applies for its risk
management strategies.
Documentation or analysis of hedging strategies that use
purchased options to determine whether based on transaction or
time period.
Considerations around the choice of hedging components of risks
for non-nancial items, including whether the components are
separately identiable and reliably measurable in the context of the
particular market structure.
Revision of hedging relationships that include voluntary
terminations.
Disclosure of information Disclosure proposals call for nancial statements to provide more
relevant detail.
Other considerations
2. Introduction and background
2.1 Overview of the IAS 39-replacement project
The IASB is revising its accounting requirements for nancial instruments. The objectives of the
project include improving the decision-usefulness of nancial statements for users by simplifying the
classication and measurement requirements for nancial instruments. This project aims to replace the
existing standard, IAS 39.
The IAS 39-replacement project, and in particular its timeline, is driven in part by requests for reform
from the G20 and other constituents. Following the G20 summit in April 2009, the Leaders Statement
called on accounting standard setters, including the IASB and the FASB, to work urgently with
supervisors and regulators to improve standards on valuation guidance and loan loss provisioning
and achieve a single set of high-quality global accounting standards. Following the conclusion of their
September 2009 summit, the G20 leaders reiterated this message and called on the international
accounting standard setters to complete their convergence project by June 2011.
The IAS 39-replacement project has three main phases:

Classication and measurement of nancial instruments the rst chapters of IFRS 9 Financial
Instruments (IFRS 9 (2009)) were published on 12 November 2009 and addressed nancial assets.
On 28 October 2010 the IASB updated IFRS9 (IFRS 9 (2010)) to address, among other topics,
nancial liabilities.

Amortised cost and impairment of nancial assets ED/2009/12 Financial Instruments: Amortised
Cost and Impairment was published on 5 November 2009. See our publication New on the Horizon:
ED/2009/12 Financial Instruments: Amortised Cost and Impairment for further information on that
exposure draft. The IASB is currently deliberating the responses received and plans to re-expose
proposals for impairment accounting early in the rst quarter of 2011. The IASB plans to nalise this
phase by June 2011.

Hedge accounting the ED was issued on 9 December 2010, which is the subject of this publication.
The IASBs proposals on portfolio or macro hedging are expected during the second quarter of 2011.
A phased approach has been adopted in order to accelerate the replacement of IAS39 and
address the consequences of the nancial crisis as speedily as possible, while giving interested
parties an opportunity to comment on the proposals in accordance with the IASBs commitment to
dueprocess.
3. Overview
Objective and
scope
Objective

To represent in the nancial statements the effect of an entitys risk
management activities when it uses nancial instruments to manage
exposures arising from a particular risk that could affect prot or loss.
Scope

Limited to only hedges of single items or hedges of closed groups of items.

Investments in equity instruments measured at fair value through other
comprehensive income would not be eligible hedged items.
Hedging
instruments

Non-derivative nancial assets or liabilities measured at fair value through prot
or loss may be designated as hedging instruments in their entirety in hedging
relationships of any risk, not only foreign currency risk.

For hedges other than hedges of foreign currency risk, the non-derivative
nancial instruments would be designated in their entirety.
Hedged items

Certain risk components of non-nancial items may be designated as hedged
items if the changes in the cash ows or fair value of the components
attributable to changes in the hedged risk are separately identiable and
reliably measureable.

The ED proposes that an entity may designate an aggregate exposure that
consists of an exposure and a derivative if the combination creates a different
exposure that is managed as a single exposure for a particular risk or risks.

A layer component may be designated as a hedged item and may be specied
from a dened, but open, population or from a dened nominal amount. For
example, the hedged item can be the bottom layer of 20 million of a 100million
xed rate bond. The dened nominal amount is the 100 million.
Qualifying
criteria
for hedge
accounting
Hedge effectiveness
The ED proposes that a qualifying hedging relationship would meet the hedge
effectiveness requirements, tested prospectively, if it:

meets the objective of the hedge effectiveness assessment, which is to
produce an unbiased result that minimises expected hedge ineffectiveness;
and

is expected to achieve other than accidental offsetting, for example, a
statistical correlation between two variables that have no substantive
economic relationship would not meet this requirement.
Accounting
for qualifying
hedges
Fair value hedges
The proposed accounting for fair value hedges is more aligned with the current
cash ow hedge accounting model under IAS 39. The proposed accounting would
be as follows:

The gain or loss from remeasuring the hedging instrument would be
recognised in other comprehensive income.

The hedging gain or loss on the hedged item would be recognised and
presented as a separate line item in the statement of nancial position with a
corresponding gain or loss in other comprehensive income. Thus, the hedged
items carrying amount would not be adjusted.

The ineffective portion of the gain or loss of the hedging relationship would be
transferred from other comprehensive income to prot or loss.
Rebalancing the hedging relationship
Under the proposals, if a hedging relationship fails subsequently to meet
the objective of the hedge effectiveness assessment but the entitys risk
management objective has not changed, then an entity would rebalance the
relationship by adjusting the hedge ratio. If the entity expects the relationship
to fail to meet the effectiveness assessment objective in the future, then it may
rebalance the hedging relationship proactively.
Rebalancing of a hedging relationship would be accounted for as a continuation
and any hedge ineffectiveness determined would be recognised immediately in
prot or loss before adjusting the hedging relationship.
Discontinuation of hedge accounting
The ED proposes that an entity would discontinue hedge accounting for all
or a portion of a hedging relationship prospectively only when the hedging
relationship either fails to meet the entitys risk management objective or fails
to meet the qualifying criteria after taking into consideration rebalancing of the
hedging relationship, if applicable.
Voluntary discontinuation of hedge accounting would be prohibited.
Accounting for time value of purchased options
Under the proposals, if an entity designates only the change in intrinsic value
of a purchased option as the hedging instrument in a fair value or cash ow
hedge, then the change in the fair value of the time value of the option would be
recognised in other comprehensive income to the extent that it relates to the
hedged item. The method used to reclassify the amounts from equity to prot or
loss would be determined by whether the hedged item is a transaction-related
hedged item, e.g. the future purchase of a commodity, or a time period-related
hedged item, such as commodity inventory.
Hedges of a
group of items
An entity may designate as a hedged item certain groups of individually eligible
items representing a gross or net position. For cash ow hedges of net positions,
any offsetting cash ows in the group would need to affect prot or loss in the
same and only in that period, including interim periods.
Disclosure The ED proposes disclosures in addition to the requirements in IFRS 7 Financial
Instruments: Disclosures; disclosures would include information about:

an entitys risk management strategy and how it is applied to manage risk;

how the entitys hedging activities may affect the amounts, timing and
uncertainty of its future cash ows; and

the effect that hedge accounting has had on the entitys statement of nancial
position, statement of comprehensive income and statement of changes in
equity.
Effective date
and transition
The effective date for the nal standard resulting from the proposals is for annual
periods beginning on or after 1 January 2013. The nal standard would be applied
prospectively and early application would be permitted. However, the hedge
accounting requirements can be applied only if all existing IFRS 9 requirements
are adopted at the same time or already have been applied.
Accounting
alternatives
to hedge
accounting
Accounting for a contract to buy or sell a non-nancial item as a
derivative
A net settleable contract that was entered into and continues to be held for the
purpose of the receipt or delivery of a non-nancial item (commonly termed as
own use contract) in accordance with the entitys expected purchases, sales or
usage requirements would be accounted for as a derivative nancial instrument if
that accounting is in accordance with the entitys underlying business model and
how the contracts are managed.
Hedging credit risk using credit derivatives
The IASB is asking for input on three alternative approaches to address situations
in which credit risk is hedged by credit derivatives as achieving hedge accounting
in these cases is often challenging.
Alternative view One of the IASB members dissented from the ED. The member does not believe
that the ED would improve nancial reporting as he believes that many of its
provisions are not operational, lack rigour and would decrease comparability.
FASB
proposals and
convergence
The IASB performed a comprehensive review of hedge accounting. It culminated
in an exposure draft that proposes fundamental changes to current accounting.
The FASBs exposure draft keeps most US GAAP hedging provisions and
proposes limited changes. The two exposure drafts have a number of signicant
differences.
4. Objective and scope
4.1 Objective
ED 1, 2, BC12 The objective of hedge accounting is to represent in the nancial statements the effect of an entitys
risk management activities when it uses nancial instruments to manage exposures arising from a
particular risk that could affect prot or loss. Hedge accounting provides an exception to the normal
recognition and measurement requirements in IFRSs as the information that results from the normal
requirements without applying hedge accounting is not determined to be useful or complete.
ED IN2 The current hedge accounting model has been described as complex, not reective of risk management
strategies and excessively rules based, resulting in arbitrary outcomes. The proposals aim to address
these criticisms by:

aligning hedge accounting more closely with risk management activities, hence resulting in more
useful information;

establishing a more objective-based approach to hedge accounting; and

addressing inconsistencies and weaknesses in the existing model.
Observations Objective
Currently, hedge accounting in accordance with IAS 39 does not make it an objective to reect an
entitys risk management strategies in its nancial statements. Many entities may welcome an
opportunity to have their nancial statements better reect the economics of their derivative and
hedging transactions. However, signicant changes to accounting systems and procedures may be
necessary to do so.
4.2 Scope
ED 2, BC19, BC20 The proposals address hedging relationships that include a single hedged item or a closed portfolio of a
group of items that constitute a gross or net position. A closed portfolio is a portfolio to or from which
items cannot be added, removed or substituted without treating each change as the transition to a new
portfolio or a new layer.
ED 3, BC17, BC18, An entitys risk management strategy often assesses risk exposures on a continuous basis and at a
BC21 portfolio level. As time passes, new exposures are continuously added to the hedged portfolio and other
exposures are removed from it. Because of the level of complexity open portfolios introduce to hedge
accounting, the IASB decided to address open portfolios or macro hedging as part of a subsequent
exposure draft. Therefore, for a fair value hedge of interest rate exposure of a portfolio of prepayable
nancial assets or nancial liabilities, the requirements of IAS 39 are retained until the second exposure
draft is nalised.
Observations Scope
The ED does not address open portfolios, however, it incorporates the concepts of applying hedge
accounting to layers of cash ows, net positions, nil net positions, and rebalancing a hedging
relationships hedging instruments and hedged items. All of these concepts inherently have an element
of an open portfolio.
Observations Objective
Observations Scope
ED 4, BC22 Investments in equity instruments designated at fair value through other comprehensive income under
IFRS 9 are not eligible hedged items as the objective of the hedge accounting model relates to risks
that could affect prot or loss. The amounts recognised in other comprehensive income for such equity
instruments are never reclassied to prot or loss.
ED BC27 However, dividends from investments in equity instruments are recognised in prot or loss.
Consequently, a forecast dividend from an equity investment measured at fair value through other
comprehensive income could be an eligible hedged item.
Example 3
5. Hedging instruments
5.1 Qualifying instruments and designation
ED 5, B5 Under the proposals, non-derivative nancial assets and liabilities measured at fair value through
prot or loss may be designated as hedging instruments in hedging relationships of any risk, not only
foreign currency risk. For hedges other than hedges of foreign currency risk, the non-derivative nancial
instruments must be designated in their entirety.
ED 6 A non-derivative nancial instrument that is not measured at fair value through prot or loss may
be designated as the hedging instrument in a hedge of foreign currency risk provided that it is not
designated at fair value through other comprehensive income.
Observations Non-derivative nancial instruments measured at fair value through prot or
loss designated as hedging instruments
The ED proposes that a non-derivative nancial instrument that is measured at fair value through
prot or loss could be designated as a hedging instrument. If such an instrument was designated
in a cash ow hedge, then the change in its value that is determined to be effective would be
recognised in other comprehensive income rather than prot or loss.
Observations Non-derivative nancial instruments measured at fair value through prot or
loss designated as hedging instruments
6. Hedged items
6.1 Qualifying items
ED 15, B9 Under the proposals, an entity may designate as the hedged item an aggregate exposure that consists
of an exposure and a derivative if the combination creates a different exposure that is managed as a
single exposure for a particular risk or risks.
ED BC50 Entities are sometimes required economically to enter into transactions that can result in multiple risk
exposures. Under an entitys risk management strategy these multiple exposures may be managed
together or separately.
ED B9, BC50
Illustrative example Hedged item as an aggregate exposure that contains a derivative
An entity hedges the foreign currency risk for the entire term of a 10-year xed rate foreign currency
debt. However, the entity requires xed rate exposure in its functional currency only for the short to
medium term, e.g. two years, and oating rate exposure in its functional currency for the remaining
term to maturity. At the end of each of the two-year intervals, i.e. on a two-year rolling basis, the
entity xes the next two years interest rate exposure. In such a situation it is common for an entity
to enter into a 10-year xed-to-oating cross-currency interest rate swap that swaps the xed rate
foreign currency debt into a variable rate domestic currency exposure. This is overlaid with a 2-year
domestic interest rate swap that, on the basis of the domestic currency, swaps variable rate debt into
xed rate debt. In effect the xed rate foreign currency debt and the 10-year xed-to-oating cross-
currency interest rate swap in combination are viewed as domestic 10-year variable rate debt for risk
management purposes. The synthetic domestic 10-year variable rate debt would be the hedged item in
a cash ow hedge of interest rate risk for two years.

Observations Hedged item as an aggregate exposure that contains a derivative
Although it is not clear, the ED seems to permit synthetic accounting for derivatives by allowing an
aggregate exposure that contains a derivative to be a hedged item. In the example above, the xed rate
foreign currency denominated debt together with the cross-currency interest rate swap synthetically
create a domestic currency variable rate instrument. This means that during the hedging relationship
the cross-currency interest rate swap would be measured at amortised cost rather than having its
changes in fair value recognised in prot or loss.
6.2 Designation of hedged items
6.2.1 Risk components
ED 18(a), B13-B15 Under the proposals, an entity could hedge a risk component of a non-nancial asset or liability.
Currently foreign currency risk is the only risk component of a non-nancial asset or liability that can
be designated in a hedge. To be eligible for designation as a hedged item, a risk component must
be a separately identiable component of the nancial or non-nancial item and the changes in the
cash ows or fair value of the item attributable to changes in that risk component must be reliably
measurable.
When identifying what risk components, contractually or non-contractually specied, of both nancial
and non-nancial items are eligible for designation as a hedged item, an entity would assess such
components in the context of the particular market structure to which the risk(s) relate(s) and in which
the hedging activity takes place.
Illustrative example Hedged item as an aggregate exposure that contains a derivative
Observations Hedged item as an aggregate exposure that contains a derivative
ED B18 The ED states that ination is not separately identiable and reliably measurable and could not
be designated as a risk component unless it is contractually specied and other cash ows of the
instrument are not affected by the ination component.
Observations Qualifying items: components of non-nancial items
IAS39 treats nancial and non-nancial items differently as to the risk components that may
be designated as hedged items. These provisions have caused an inconsistency between risk
management strategies and accounting and were commonly noted as concerns during the IASBs
outreach activities. The ED applies the separately identiable and reliably measurable criteria to both
nancial and non-nancial items.
Manufacturers often may hedge their inventory with derivatives whose underlyings relate to the raw
materials used to produce that inventory, e.g. a tire manufacturer may use a rubber forward contract
to hedge its tire inventory. Under IAS 39, the manufacturer could hedge the entire price risk in the
inventory, but not the rubber component only. Also, entities may use derivative contracts to hedge the
forecasted sales or purchases of a commodity of a different grade, e.g. a manufacturer of premium
chocolate may use an exchange grade quality cocoa forward contract to hedge its forecasted purchase
of premium grade cocoa. Under IAS 39, the price risk of the entire purchase could be hedged, but not
just the exchange grade quality component. Under the ED, such risk components may be eligible for
hedge accounting, which would allow entities that use commodity derivatives greater exibility in the
application of hedge accounting.
ED B15(a)
Illustrative example Contractually specied risk component
Company B has a long-term supply contract to purchase natural gas that is priced using a contractually
specied formula that references gas oil, fuel oil and transportation charges. Bs risk management
strategy is to hedge 100 percent of its exposure to gas oil price risk and enters into gas oil forward
contracts to hedge that price risk. The gas oil component is specied contractually. B determines
that the gas oil price exposure is separately identiable and that gas oil price exposure is reliably
measurable, therefore, the gas oil price exposure is an eligible risk component for designation as a
hedged item.
ED B15(b)
Illustrative example Non-contractually specied risk component
Company C has a long-term supply contract to purchase jet fuel. Cs risk management strategy is to
hedge a portion of its exposure to jet fuel price risk based on expected consumption up to 24 months
before delivery and increase the coverage volume as delivery gets nearer. C uses the following
derivatives as hedging instruments during the different time horizons based on the liquidity of the
derivatives markets:

12 months to 24 months crude oil contracts

6 months to 12 months gas oil contracts

under 6 months jet fuel contracts.
Although crude oil and gas oil are not contractually specied components of jet fuel prices, C has
determined that based on analysis of the market structure for oil and oil products there is a relationship
between crude oil and gas oil prices, and jet fuel prices. C has determined that the relationship results
from different rening margins (also known as cracking spreads) that allow the price of jet fuel to be
made up of building blocks. Therefore, C is exposed to two risk components, even though they are
not specied contractually: crude oil prices and rening margins. If C determines that the two risk
components are separately identiable and reliably measurable, then it may designate crude oil or gas
oil as risk components of the forecast jet fuel purchases.
Observations Qualifying items: components of non-nancial items
Illustrative example Contractually specied risk component
Illustrative example Non-contractually specied risk component
6.2.2 Components of nominal amounts
ED 18, B19 Under the proposals, there are two types of components of nominal amounts that can be designated
as the hedged item in a hedging relationship: a percentage component of a nominal amount or a layer
component.
ED B20 An example of a percentage component of a nominal amount is an entity designating 50 percent of the
interest payments of a xed rate bond as the hedged item in a fair value hedging relationship.
ED B21-B23 A layer component may be specied from a dened, but open, population or from a dened nominal
amount. If the layer component is designated as the hedged item in a fair value hedging relationship,
then an entity would specify it from a dened nominal amount. A layer component of a contract that
includes a prepayment option would not be eligible to be designated as a hedged item in a fair value
hedge if the options fair value is affected by changes in the hedged risk.
Observations Layer component of a nominal amount
Designating a percentage component of a nominal amount as the hedged item can give rise to a
different accounting outcome when compared with designating a layer component of a nominal
amount.
For example, assume that a 5-year, 100 million debt instrument repays 20 million per year. If the
hedged component is designated as 20 percent of the debt instrument, then the determination of the
gain or loss on the hedged component due to the hedged risk would consider the cash ows of the
instrument over its entire life multiplied by 20 percent. Alternatively, if the hedged component was the
last 20million of principal of the debt instrument, i.e. a bottom layer, the determination of the hedging
gain or loss on the hedged component would consider only the last payment of 20 million. This may
minimise ineffectiveness.
Observations Layer component of a nominal amount
7. Qualifying criteria for hedge accounting
7.1 Hedge effectiveness
ED 19, B27 Hedge effectiveness is the extent to which changes in the fair value or cash ows of the hedging
instrument offset changes in the fair value or cash ows of the hedged item. Hedge ineffectiveness on
the other hand is the extent to which there is no such offset or the changes in fair value or cash ows of
the hedging instrument more than offset those on the hedged item.
ED B28 When designating a hedging relationship and on an ongoing basis, an entity would analyse expected
sources of ineffectiveness that are expected to affect the hedging relationship during its term. This
analysis would serve as the basis for the entitys expectation of hedge ineffectiveness for the hedging
relationship. A qualifying hedging relationship would meet the hedge effectiveness requirements if it:

meets the objective of the hedge effectiveness assessment; and

is expected to achieve other than accidental offsetting.
7.1.1 Objective and extent of offset
ED B29 The objective of the hedge effectiveness assessment under the proposals is to ensure that the hedging
relationship would produce an unbiased result and minimise expected hedge ineffectiveness. This
means that an entity, based on its expectations, cannot choose deliberately a hedge ratio that would
result in the changes in value of the hedging instrument systematically either exceeding or being less
than the changes in fair value of the hedged item for the hedged risk. However, this does not mean that
perfect effectiveness would be a requirement to apply hedge accounting.
ED B30 An entity would consider the relationship between the weightings of the hedging instrument and
the hedged item when assessing whether the hedging relationship would minimise the expected
ineffectiveness. For example, an entity wants to hedge a forecast purchase of 100 tonnes of a
commodity of a particular grade in Location B and that commodity usually trades at about 90 percent
of the price for the exchange-traded commodity benchmark grade of the same commodity in Location
C. If the entity wants to hedge the forecast purchase of 100 tonnes with exchange-traded forward
contracts, then a forward contract volume to purchase 90 tonnes of the expected benchmark grade of
the commodity in Location C would be expected to offset best the entitys exposure to changes in the
cash ows for the hedged purchase. Hence, a hedge ratio of 1.11:1 would minimise expected hedge
ineffectiveness.
Observations Objective and extent of offset
The effectiveness assessment proposed in the ED is forward looking only and does not prescribe an
arbitrary effectiveness range. This will require changes to systems and procedures since currently they
are focused on documenting that hedging relationships are prospectively and retrospectively effective
within a range of 80 to 125 percent.
Observations An unbiased result and minimising expected ineffectiveness
The requirement that a hedging relationship produce an unbiased result and minimise expected hedge
ineffectiveness raises the question as to whether an entity must choose the hedging instrument that
provides the best possible offset to the hedged item. It seems that this need not be the case. An
entity would choose a hedging instrument that minimises ineffectiveness while adhering to its risk
management policies, which may consider the appropriate market conventions and transaction costs.
Thus, an entity may not need to use a hedging instrument that has high transaction costs just because
in theory it provides a slightly better offset.
Observations An unbiased result and minimising expected ineffectiveness
Observations Objective and extent of offset
7.1.2 Other than accidental offset
ED B31 Under the proposals, as part of the hedge effectiveness assessment, an entity would analyse the
economic relationship between the hedging instrument and hedged item to determine whether the
expected offsetting is other than accidental. Two examples of accidental offsetting are:

The changes in value of a hedging instrument and hedged item for the hedged risk are statistically
correlated and achieve perfect offsetting but are not supported by a substantive economic
relationship.

The changes in value of a hedging instrument and hedged item continue to offset even though the
relationship between them has broken down because the counterparty to the hedging instrument is
experiencing a severe deterioration in its credit standing that is unrelated to the hedged item and only
affects the hedging instrument.
Observations Effectiveness assessment
The ED provides guidance on assessing effectiveness. However, this guidance is given in the context
of an entitys risk management policies. Therefore, it will be up to entities to dene clearly and apply
consistently their effectiveness assessment policies.
7.1.3 Frequency of and methods for assessing hedge effectiveness requirements
ED B32 Under the proposals, an entity would assess hedge effectiveness at the inception of the hedging
relationship and at a minimum each reporting period or upon a signicant change in the circumstances
affecting the hedge effectiveness requirements, whichever comes rst. As the assessment relates
to expectations about hedge ineffectiveness and offsetting, the test would be only forward looking or
prospective.
ED B33 The proposals do not specify a specic methodology, either quantitative or qualitative, for assessing
whether a hedging relationship meets the hedge effectiveness requirements.
ED B34 If the critical terms of the hedging instrument and the hedged item, e.g. the nominal amount, maturity
and underlying, match or are closely aligned, then it may be possible to use a qualitative methodology to:

determine that the relationship would achieve systematic, unbiased and other than accidental
offsetting; and

calculate the optimal hedge ratio and support an expectation that the hedge ratio would minimise any
hedge ineffectiveness.
ED B36 Conversely, if the critical terms were not closely aligned, then there would be an increased level
of uncertainty relating to whether the relationship meets the hedge effectiveness requirements.
Therefore, an entity may need to use a quantitative effectiveness assessment methodology to support
its expectations. Similarly, the entity might also need a quantitative assessment to determine an
appropriate hedge ratio and to support an expectation that the hedge ratio would minimise any hedge
ineffectiveness.

Observations Qualitative or quantitative assessment
If the critical terms of the hedging instrument and the hedged item match or are closely aligned, a
qualitative effectiveness assessment may be appropriate. In other cases, a quantitative assessment
may be more appropriate. The ED provides examples of critical terms but does not dene the terms
critical terms or closely aligned. Since these concepts are important in determining the type of
effectiveness assessment that should be used, an entity will have to use its judgement in developing
accounting policies to identify which terms it considers critical and what it considers to be closely
aligned.
Observations Effectiveness assessment
Observations Qualitative or quantitative assessment
ED B37 An entity would have to consider whether they need to change assessment methodologies if there are
changes in circumstances that affect hedge effectiveness to ensure that all relevant characteristics of
the hedging relationship including sources of hedge ineffectiveness are captured.
7.2 Documentation
ED 19 At inception of the hedge there would be formal designation and documentation of the hedging
relationship and the entitys risk management objective and strategy for undertaking the hedge. In
addition to the current hedge documentation requirements of IAS 39, an entity would document how
it will assess whether the hedge relationship meets the revised hedge effectiveness requirements,
including its analysis of the sources of ineffectiveness and how it determines the hedge ratio.
Observations Risk management and effectiveness assessment
Risk management strategies may be set at various levels, e.g. entity-wide, business unit,
geographic area, portfolios, or individual items. This can vary from entity to entity and within an
entity as well. The hedge accounting provisions of the ED, which call for the hedging relationship to
be aligned with the entitys risk management strategy, may need to be applied at a different level
of granularity from those an entity currently applies for its risk management strategies. This could
potentially create the need for an entity to re-write its current risk management policies and/or
create ones if they do not exist.
ED B53
Observations Hedge accounting required to be aligned with risk management
The qualifying criteria for hedge accounting in the ED do not explicitly state that a hedging relationship
needs to be aligned with the entitys risk management objectives. However, the discontinuation
discussion in the ED states that if the risk management objective for a hedging relationship changes
and is no longer aligned, then the entity would discontinue hedge accounting. Therefore, in order to
qualify for hedge accounting, a hedging relationship must be aligned with an entitys risk management
objectives at inception.
Observations Hedge accounting required to be aligned with risk management
Observations Risk management and effectiveness assessment
8. Accounting for qualifying hedges
8.1 Types of hedging relationships
ED 21 The proposals retain the three types of hedging relationships in IAS 39: fair value hedges, cash ow
hedges and hedges of the net investment in a foreign operation.
8.1.1 Fair value hedges
ED 26 Under the proposals, accounting for fair value hedges would be more aligned with the current cash
ow hedge accounting model. The gain or loss from remeasuring the hedging instrument would be
recognised in other comprehensive income. The gain or loss on the hedged item, attributable to the
hedged risk, would be recognised and presented as a separate line item in the statement of nancial
position with a corresponding gain or loss in other comprehensive income.
The separate line item would be presented in assets next to the line item that includes the hedged
asset or presented in liabilities next to the line item that includes the hedged liability, until the hedged
item is derecognised.
The ineffective portion of the gain or loss of the hedging relationship would be transferred from other
comprehensive income to prot or loss.
Observations Fair value hedge accounting
For a fair value hedge under IAS 39, the full change in fair value of the hedging instrument and the
change in fair value of the hedged item that is attributable to the hedged risk are both recognised
directly in prot or loss, which results in current period recognition of ineffectiveness in prot or
loss. The accounting for a fair value hedge under the ED results in the same net effect on prot or
loss even though the changes in the hedging instrument and hedged item are recognised rst in
other comprehensive income, offsetting each other.
ED 26, 27 If the hedged item is an unrecognised rm commitment, then the subsequent cumulative change in the
fair value of the hedged item would be recognised as an asset or liability with a corresponding gain or
loss recognised in other comprehensive income. If the unrecognised rm commitment is to acquire or
assume a non-nancial item, then upon settlement of the rm commitment the initial carrying amount
of the resulting non-nancial item would be adjusted to include the cumulative change recognised in the
statement of nancial position.
ED 28 If the hedged item is a nancial instrument, then the amortisation of the separate line item in the
statement of nancial position would follow the existing guidance in IAS 39 for amortisation of an
adjustment to the carrying amount of a hedged item.
Observations Separate line item for hedged item
Under IAS 39, the change in fair value of the hedged item that is attributable to the hedged risk
is recognised as an adjustment to the hedged item; therefore, the hedged item is reported at
an amount that is neither amortised cost nor fair value. Under the ED, this adjustment would be
reported in a separate line item rather than as part of the actual hedged item; therefore, if the
hedged item is measured at amortised cost, the amortised cost basis of the hedged item itself
would be preserved. However, this separate line item, viewed in isolation and being a gain or loss,
meets neither the denition of an asset or a liability. The line item has been created to preserve the
amortised cost basis of the hedged item.
Observations Separate line item for hedged item
Observations Fair value hedge accounting
8.1.2 Cash ow hedges
ED 29 Under the proposals, for a hedge of a forecast transaction resulting subsequently in the recognition of
a non-nancial item, the entity would remove the entire amount related to that transaction in the cash
ow hedge reserve, accumulated in equity, and include it directly in the initial cost of the item, which is
commonly called a basis adjustment. This is not a reclassication adjustment under IAS 1 Presentation
of Financial Statements and therefore does not affect other comprehensive income. This accounting
also would apply to a forecast transaction for a non-nancial item that becomes a rm commitment for
which fair value hedge accounting is applied. For all other cash ow hedges, such as cash ow hedges
over forecast transactions resulting in the recognition of nancial instruments, the amount related to
the transaction in the cash ow hedge reserve would be reclassied to prot or loss as a reclassication
adjustment in the same period or periods during which the hedged expected future cash ows affect
prot or loss.
Observations Cash ow hedges that result in recognising non-nancial items
Under IAS 39, if a hedge of a forecast transaction results subsequently in the recognition of a non-
nancial item, then an entity has the option to treat the associated gains and losses that were
accumulated in the cash ow hedge reserve as a basis adjustment or to retain these amounts in
the reserve and reclassify them to prot or loss as the asset acquired or liability assumed affects
prot or loss. This accounting also would apply to a forecast transaction for a non-nancial item that
becomes a rm commitment for which fair value hedge accounting is applied. The ED removes this
accounting policy election.
8.2 Measurement of hedge ineffectiveness
ED B43 Consistent with the current requirements under IAS 39, when measuring hedge ineffectiveness, an
entity would consider the time value of money. Hence, the entity would determine the value of the
hedged item on a present value basis and therefore the change in the value of the hedged item also
would include the effect of the time value of money.
ED B44 One possible way of calculating the change in value of the hedged item for hedge effectiveness or
ineffectiveness is to use a derivative that would have the critical terms of the hedged item and would
be at the money at the time of designation, which is referred to commonly as a hypothetical derivative.
The hypothetical derivative replicates the hedged item and hence results in the same outcome as if
that change in value was determined by a different approach. The change in value of the hedged item
determined using a hypothetical derivative may also be used for the purposes of assessing whether a
hedging relationship meets the hedge effectiveness requirements.
ED BC104, BC105 A hypothetical derivative is not a method in its own right for assessing hedge effectiveness or
measuring ineffectiveness. Instead, a hypothetical derivative is one possible way of determining an
input for other methods for example, statistical methods or dollar-offset, to assess the effectiveness of
the hedging relationship or measure ineffectiveness.
ED BC99 Although the proposals do not prescribe a specic methodology for assessing hedge effectiveness,
because the measurement of hedge ineffectiveness would be based on the actual performance of the
hedging instrument and the hedged item, the IASB proposed to retain that hedge ineffectiveness would
be measured by comparing the change in their values (the dollar offset method).
8.3 Rebalancing the hedging relationship and changes to the
hedge ratio
ED 23 Under the proposals, if a hedging relationship subsequently fails to meet the objective of the
hedge effectiveness assessment, i.e. the hedging relationship would not produce an unbiased
Observations Cash ow hedges that result in recognising non-nancial items
result or minimise hedge ineffectiveness, but the entitys risk management objective has not
changed and the relationship continues to achieve other than accidental offset, then an entity
would be required to rebalance the relationship by adjusting the hedge ratio. If the entity expects
the relationship to fail to meet the effectiveness assessment objective in the future, then it may
proactively rebalance the hedging relationship.
ED B46 The following decision tree illustrates the rebalancing model:

ED B47 Rebalancing of a hedging relationship would be accounted for as a continuation and any hedge
ineffectiveness that has arisen to date would be recognised in prot or loss immediately before
adjusting the hedging relationship.
ED B48 By adjusting the hedge ratio, an entity would be allowed to compensate for changes in the
relationship between the hedging instrument and the hedged item arising from the underlyings or
risk variables. This adjustment would allow an entity to continue the hedging relationship when the
relationship between the hedging instrument and the hedged item changes in a way that can be
compensated for by adjusting the hedge ratio.
ED B50 Not every change in the extent of offset constitutes a change in the relationship between the
hedging instrument and hedged item and an entity would determine whether the changes in offset
are:

uctuations around the hedge ratio that remains valid; or

an indication that the hedge ratio no longer reects appropriately the relationship between the
hedging instrument and the hedged item.
ED B49
Illustrative example Evaluating changes in offset
Background
Company B hedges its price risk exposure to a forecast purchase of a commodity in Location C with
exchanged traded contracts for the same commodity but of a different grade in Location D.
Hedge ratio remains valid B should not rebalance
Due to uctuations in transportation costs of the commodity in Location C, B recognises some
ineffectiveness on the hedge relationship. B determines that the uctuations in transportation costs
are within the expected range of uctuations in its risk management policy and that there has not
been a change in the relationship between the price of the commodity in Location C and the price of
the exchange traded contracts for the commodity in Location D. Therefore, the change in the extent of
offset is a matter of measuring and recognising hedge ineffectiveness but not adjusting the hedge ratio.
Hedge ratio is no longer appropriate B should rebalance
If there is a change in the relationship between the two commodities and therefore the statistical
correlation between the price of the commodity in Location C and the price of the exchange traded
commodity contracts in Location D is altered, then rebalancing the hedging ratio to reect the
new correlation would ensure that the relationship continues to meet the objective of the hedge
effectiveness assessment. An example of such a change can be a new use for one of the commodities
such that demand for it has been increased for the foreseeable future.
ED B60 If an entity rebalances a hedging relationship, then the entity would update its hedge documentation
including the analysis of the sources of hedge ineffectiveness that are expected to affect the hedging
relationship during its remaining term.
ED B54 Under the proposals, a rebalancing adjustment of the hedging relationship can be effected as follows:

weighting of the hedged item can be increased by either increasing the volume of the hedged item or
decreasing the volume of the hedging instrument; or

weighting of the hedging instrument can be increased by either increasing the volume of the hedging
instrument or decreasing the volume of the hedged item.
The changes in volume refer to the quantities that are part of the hedging relationship. Decreases
in volume do not necessarily mean that the items or transactions no longer exist, or are no longer
expected to occur but that they are not part of the hedging relationship.
ED B55 If an entity adjusts the hedge ratio by increasing the volume of the hedged item, then the
remeasurement of the hedging instrument would be unaffected and the previously designated volume
of the hedged item would be unaffected. However, subsequent to the rebalancing the change in value
of the hedged item would include the change in value of the additional volume or additional layer. These
changes would be measured starting from and by reference to the date of rebalancing rather than the
Illustrative example Evaluating changes in offset
date on which the hedging relationship was originally designated. Therefore, the additional volume
hedged may have different changes in value from those of the originally hedged volume.
ED B56 If an entity adjusts the hedge ratio by decreasing the volume of the hedging instrument, then the
remeasurement of the hedged item would be unaffected and the previously designated hedging
instrument that continues to be designated would be unaffected. However, subsequent to the
rebalancing the volume by which the hedging instrument was decreased would no longer be part of the
hedging relationship and would be marked to market through prot or loss unless it was designated in
another hedging relationship.
ED B57 If an entity adjusts the hedge ratio by increasing the volume of the hedging instrument, then the
remeasurement of the hedged item would be unaffected and the previously designated hedging
instrument would be unaffected. However, subsequent to rebalancing the changes in value of the
hedging instrument would include the changes in value of the additional volume of hedging instrument.
It is likely that the derivatives have different critical terms as they were entered into at different times.
Therefore, subsequent changes in value of the derivatives would be different.
ED B58 If an entity adjusts the hedge ratio by decreasing the volume of the hedged item, then the
remeasurement of the hedging instrument would be unaffected and the previously designated volume
of the hedged item that continues to be designated would be unaffected. However, subsequent to
the rebalancing the volume by which the hedged item was decreased would no longer be part of the
hedging relationship.
ED B58 An entity may rebalance proactively a hedging relationship if it aims to ensure that the hedging
relationship would continue to meet the objective of the hedge effectiveness assessment. For example,
if an entity observes changes in the extent of offset in the hedging relationship that follow an unusual
pattern, the entity would have to determine that although the relationship still meets the objective of
the hedge effectiveness assessment, adjusting the hedge ratio would reduce the likelihood of ceasing
to meet the objective in the future.
Observations Beginning amortisation after rebalancing
When rebalancing a fair value hedging relationship involves decreasing the volume of a hedged item
that is a nancial instrument, the entity would begin amortising the amount within the separate line
item in the statement of nancial position related to the volume that is no longer part of the hedging
relationship.This means that entities will have to keep track of the accumulated gains or losses for the
risk being hedged related to the individual hedged items.
8.4 Discontinuation of hedge accounting
ED 24 Under the proposals, an entity would discontinue hedge accounting prospectively only when the
hedging relationship fails to meet the qualifying criteria after taking into consideration rebalancing
of the hedging relationship, if applicable. They would prohibit voluntary discontinuation when the
qualifying criteria are met. Examples of when discontinuation would be required include when the
risk management objective for the hedging relationship has changed or when the hedging instrument
expires or is sold, terminated or exercised, excluding scenarios where the expiration or termination is
part of a documented replacement or rollover hedging strategy.
ED B66 If an entity discontinues a hedging relationship, then it can designate a new hedging relationship that
involves the hedging instrument or the hedged item but that designation constitutes the start of the
new hedge relationship, not the continuation of the old one.
ED B65 If an entity fails to predict its volume of highly probable forecast transactions accurately with the result
that the expected volume is lower than the originally designated volume, then partial discontinuation
would be appropriate. However, if an entity has a history of such downward adjustments of its
Observations Beginning amortisation after rebalancing
forecasts, then this may call into question the entitys ability to predict forecast transactions accurately
and whether similar forecast transactions would be highly probable and therefore eligible hedged items.
8.5 Accounting for the time value of purchased options
ED 8, 33 Under the proposals, when using a purchased option, an entity can separate the intrinsic value and the
time value of the option contract and designate only the change in intrinsic value of the option as the
hedging instrument.
If an entity designates only the change in intrinsic value of a purchased option as the hedging
instrument in a fair value or cash ow hedge, then the change in fair value of the time value of the
option would be recognised in other comprehensive income to the extent that it relates to the hedged
item. The method used to reclassify the amounts from equity to prot or loss would be determined by
whether the hedged item is a transaction-related hedged item or a time period-related hedged item.
8.5.1 Determining the type of hedged item
ED B67 An entity would determine the type of hedged item on the basis of the nature of the hedged item
regardless of whether the hedging relationship is a cash ow hedge or a fair value hedge.
The time value of a purchased option would relate to a transaction-related hedged item if the nature
of the hedged item is that of transaction costs. An example of a transaction-related hedged item is an
entity hedging the future purchase of a commodity against commodity price risk and the transaction
costs are included in the initial measurement of the inventory.
The time value of an option would relate to a time period-related hedged item if the nature of the
hedged item is that of the cost for obtaining protection against a risk over a specic period of time.
However, the hedged item does not result in a transaction that involves the notion of transaction cost
as noted above. An example of a time period-related hedged item is an entity hedging its commodity
inventory for six months using a commodity option with a corresponding life.
8.5.2 Accounting for the time value
ED 33 Transaction-related hedged items
Under the proposals, the change in fair value of the time value of an option that hedges a transaction-
related hedged item would be recognised in other comprehensive income.
If the hedged item results in recognition of a non-nancial asset or liability, or a rm commitment for
which fair value hedge accounting is applied, then the entity would be required to remove the amount
from the separate component of equity and would include it directly in the initial cost or other carrying
amount of the item. This would not be a reclassication adjustment under IAS 1 and therefore would
not affect other comprehensive income. In other cases, the entity would be required to reclassify the
amount from the separate component of equity to prot or loss as a reclassication adjustment in the
same period or periods when the hedged future cash ows affect prot or loss.
Any portion of the time value of an option recognised in other comprehensive income that is not
expected to be recovered in future periods would be required to be reclassied into prot or loss as a
reclassication adjustment.
Time period-related hedged items
The change in fair value of the time value of an option that hedges a time period-related hedged item
would be recognised in other comprehensive income. The original time value paid to the option writer
would be amortised on a rational basis over the term of the hedging relationship. Hence, in each period
the amortisation amount would be required to be reclassied from the separate component of equity to
prot or loss as a reclassication adjustment.
However, if the hedging relationship that includes the intrinsic value of the option is discontinued, then the
net amount that has been accumulated in the separate component of equity, net of cumulative amortisation,
would be required to be reclassied immediately into prot or loss as a reclassication adjustment.
Observations Transaction-related vs time period-related hedged items
If an entity designates the intrinsic value of a purchased option as a hedging instrument, then the
accounting for that options time value depends on whether the hedged item is related to a transaction
or time period. Entities will need to analyse their hedging strategies that use options in order to make
this determination, as they may not have previously documented their option strategies in this manner.
8.5.3 Aligned time value vs actual time value
ED B68 Under the proposals, the specic accounting guidance for the time value of purchased options
described above would apply only to the extent that the time value relates to the hedged item. This
is referred to as the aligned time value. An entity would determine the aligned time value using the
valuation of the option that would have critical terms that perfectly match the hedged item.
Observations Aligned time value vs actual time value
The aligned time value would be the time value of an option that would have critical terms that
perfectly match the hedged item. An entity would need to determine which features of the option
it considers to be critical, including what type of option is appropriate, i.e. American, European,
Bermudan etc. This would require the use of judgement, which should be applied consistently.
ED B68, B69 If the actual time value of the option, i.e. the time value included in the premium paid, differs from the
aligned time value, then the method that the entity would use to account for the difference during the
hedging relationship would be as follows:

If, at inception of the hedging relationship, the actual time value is higher than the aligned time value,
then the entity:
would determine the amount that is accumulated in a separate component of equity on the basis
of the aligned time value; and
would account for the differences in the fair value changes between the two time values in prot
or loss.

If, at inception of the hedging relationship, the actual time value is lower than the aligned time value,
then the entity:
would determine the amount that is accumulated in a separate component of equity by reference
to the lower of the cumulative change in fair value of the actual time value and the aligned time
value; and
would recognise in prot or loss any remainder of the change in fair value of the actual time value.
Observations Aligned time value vs actual time value
Observations Transaction-related vs time period-related hedged items
9. Hedges of a group of items
9.1 Eligibility of a group of items as the hedged item
ED 34 Under the proposals, a group of items, including both gross and net positions, would be an eligible
hedged item if:

the position consists of items, including components of items, that individually would be eligible
hedged items as noted in Section 6 of this publication;

the items in the group are managed together on a group basis for risk management purposes; and

for the purpose of cash ow hedge accounting only, any offsetting cash ows in the group of hedged
items that is exposed to the hedged risk, would affect prot or loss in the same and only in that
reporting period including interim periods as dened in IAS 34 Interim Financial Reporting.
Observations Hedges of gross positions
Under IAS 39, in order for a group of items to qualify for hedge accounting, additional criteria must
be met. More specically, the individual items within the group must have similar risk characteristics
and the change in the fair value attributable to the hedged risk for each individual item in the group
must be approximately proportional to the overall change in the fair value of the group for the hedged
risk. These restrictions are not consistent with the way that many entities management risk. The ED
does not require such criteria to be met to hedge a gross position. Therefore, the ED may allow hedge
accounting in some cases where the approximately proportional test could not be met under IAS 39.
ED B70-B73 If the position is a net position, then it would be eligible as a hedged item only if the entity hedges the
exposure on a net basis for risk management purposes. The determination of whether an entity hedges
on a net basis is a matter of fact, not based on assertion or documentation. An entity would designate
the overall group of items that includes the items that make up the net position.
For example, if an entity has a group of rm foreign currency denominated sale commitments in nine
months time for 100 and a group of rm foreign currency denominated purchase commitments in
18 months time for 120, the entity cannot designate an abstract amount of a net position up to 20.
Instead, it would designate a gross amount of purchases and a gross amount of sales that together give
rise to the hedged net position.
Observations Hedges of net positions
Business units within an entity are exposed to various risks in the normal course of business. These
business units often transfer these risks to one central business unit within the entity through the
use of internal derivatives. Many of the risks transferred to the central business unit offset naturally.
The central business unit in turn transfers risk to external parties on a net basis. This is a common risk
management strategy as it reduces transaction costs and counterparty credit risk exposure.
IAS 39 does not allow net position hedging, which is inconsistent with the risk management strategy
described above. By allowing net position hedging, the ED better aligns hedge accounting and such a
risk management strategy.
Entities will need to give consideration in order to determine what information system and internal
procedures will need to be made to operationalise hedge accounting on a net position basis.
Observations Hedges of gross positions
Observations Hedges of net positions
ED 39 A group that is a nil net position, i.e. the hedged items fully offset the risk that is managed on a group
basis, would be an eligible hedged item if:

the hedge is part of a rolling net risk hedge strategy for a hedged position that changes in size over
time;

over the life of the rolling net risk hedge strategy eligible hedging instruments would be used to
hedge the net risk when the net position is not nil;

hedge accounting is normally applied to such net positions when the net position is not nil and it is
hedged with eligible hedging instruments; and

not applying hedge accounting to the nil net position would give rise to inconsistent accounting
outcomes as the accounting would not recognise the offsetting risk position that would otherwise be
recognised in a hedge of a net position.
ED BC182 The IASB noted that a group that is a nil net position would be coincidental and would therefore be rare
in practice.
9.2 Cash ow hedges of groups of items that constitute a
net position
ED B74, B75 Under the proposals, an entity can only designate groups of items that constitute a net position with
offsetting risks that affect prot or loss in different reporting periods in a fair value hedging relationship.
A cash ow hedging relationship would not be eligible as the gross items that constitute the net
position will not naturally offset in net prot or loss as they affect prot or loss in different reporting
periods. Therefore an entity cannot gross up net hedging instrument gains or losses for recognition
in different periods, nor can an entity defer value changes from one hedged item to match the later
recognition of another hedged item.
9.3 Designation of a component of a nominal amount
ED 35, 36 Under the proposals, an entity could designate a percentage component of an eligible group of items
as a hedged item if it is consistent with the entitys risk management objective. An entity can also
designate a layer component of an eligible group of items, such as the bottom layer, if the following
requirements are met:

the layer is separately identiable and reliably measurable;

the risk management objective is to hedge a layer component;

the items in the overall group from which the layer is identied are exposed to the same hedged risk;

for hedges of existing items an entity can identify and track the overall group of items from which the
hedged layer is dened; and

the items in the group do not contain prepayment options other than those whose fair value is not
affected by the hedged risk.
ED B78 A hedging relationship can include layers from multiple different groups of items. For example, in a net
position hedge of a group of assets and a group of liabilities, the hedging relationship can comprise, in
combination, a layer component of the group of assets and a layer component of the group of liabilities.
9.4 Presentation
ED 37, B81, B82 For a group of items in a fair value or cash ow hedge that has offsetting risk positions that affect
different line items in the statement of comprehensive income, the recognition of any hedging
instrument gains or losses in prot or loss would be presented in a separate line from those affected
by the hedged items. This is to avoid the grossing up of a single hedging instruments net gains or
losses into offsetting gross amounts and recognising them in different line items in the statement
of comprehensive income. For some fair value hedges, the objective of the hedge is not primarily to
offset the fair value changes of the hedged item but rather to transform the cash ows, for example
transforming the xed interest cash ows of a xed rate note into oating interest cash ows using an
interest rate swap. For this type of hedge the net interest accrual on the interest rate swap would be
accrued in prot or loss.
If the group of items does not have any offsetting risk positions, in a cash ow hedge or a fair value
hedge, then the hedging instrument gains or losses would be apportioned to the line items in the
statement of comprehensive income affected by the hedged items on a rational basis, without grossing
up the net gains or losses arising from a single hedging instrument.
ED 38 For groups of items in a fair value hedging relationship either with or without offsetting risks, the gains
or losses on the assets or liabilities would be recognised in the statement of nancial position as it
would be for one-for-one hedging relationships and presented on a gross basis next to each line item
that includes the related asset or liability. This is consistent with the designation of the hedged item
being the overall group of items, not a non-specic abstract net position amount.

10. Disclosures
10.1 General
ED 40 Under the proposals, in the ED, an entity would disclose, in addition to the requirements in IFRS 7, the
following:

an entitys risk management strategy and how it is applied to manage risk;

how the entitys hedging activities may affect the amount, timing and uncertainty of its future cash
ows; and

the effect that hedge accounting has had on the entitys primary nancial statements.
Observations Disclosure
Financial statement users have expressed to the IASB that they do not nd current hedge accounting
disclosures helpful. The IASB has designed the above disclosure requirements to address that concern.
Financial statement preparers will need to give thoughtful consideration and exercise judgment in
providing information that is relevant.
ED 41 An entity would present the required disclosures in a single note or separate section in its nancial
statements. However, an entity would not need to duplicate information that is already presented
elsewhere, provided that information is incorporated by cross-reference and is available for users of the
nancial statements.
ED 42 For those disclosures that would require an entity to separate by risk category, each category of risk
would be determined on the basis of the risk exposures that the entity decides to hedge for which
hedge accounting is applied. Such determinations would be made consistently.
ED 43, BC200 Although an entity would be allowed to determine the extent of aggregation or disaggregation of the
disclosures, an entity should consider the level of aggregation it uses for other disclosure requirements
in IFRS 7.
10.2 Risk management strategy
ED 44 One of the concepts included in the proposals is that an entity would explain its risk management
strategy for each category of risk exposure that it decides to hedge and for which hedge accounting
would be applied. The explanation should enable users of nancial statements to evaluate, for example:

how each risk arises;

how the entity manages each risk, including whether the entity hedges an item in its entirety for all
risks or hedges risk components of an item; and

the extent of risk exposure that the entity manages.
10.3 Amount, timing and uncertainty of future cash ows
ED 45 Under the proposals, an entity would disclose, for each category of risk exposure, quantitative
information to enable users of its nancial statements to evaluate the types of risk exposures being
managed in each risk category, the extent to which each type of risk exposure is hedged and the effect
of the hedging strategy on each type of risk exposure.
Observations Disclosure
ED 46 An entity would provide a breakdown for each subsequent period that the hedging relationship is
expected to affect prot or loss, including:

the monetary amount or other quantity to which the entity is exposed for each particular risk; for
hedges of groups of items, an entity would explain the risk exposure in the context of a group or net
position;

the amount or quantity of the risk exposure being hedged; and

in quantitative terms, how hedging changes the exposure.
ED 46, 47 For each category of risk, an entity would disclose a description of the sources of hedge ineffectiveness
that are expected to affect the hedging relationship during its term. If other sources of hedge
ineffectiveness emerge in the hedging relationship, then an entity would disclose those sources and
explain the resulting hedge ineffectiveness.
10.4 Effect of hedge accounting on the primary nancial
statements
10.4.1 Hedging instrument
ED 49 Under the proposals, an entity would disclose, in a tabular format, the following amounts related to
items designated as hedging instruments separately by category of risk for each type of hedge:

the carrying amount of the hedging instruments, separating nancial assets from nancial liabilities;
and

the notional amounts or other quantity related to the hedging instruments.
10.4.2 Hedged item
ED 50 An entity would disclose, in tabular format, the following amounts related to hedged items separately
by category of risk for each type of hedge:
Fair value hedges
the carrying amounts of the accumulated gains or losses on the hedged
items presented in a separate line item in the statement of nancial
position, separating assets from liabilities; and

the balance remaining in the statement of nancial position of any
hedges for which hedge accounting has been discontinued.
Cash ow hedges
and hedges of a
net investment in a
foreign operation

the balance in the cash ow hedge reserve for continuing hedges that will
be reclassied when the hedged item affects prot or loss; and

the balance remaining in the cash ow hedge reserve from any hedges
for which hedge accounting has been discontinued.
10.4.3 Changes during the reporting period
ED 51 An entity would disclose, in tabular format, the following amounts separately by category of risk for
each type of hedge:
All hedge types
changes in the value of hedging instruments recognised in other
comprehensive income;

hedge ineffectiveness recognised in prot or loss; and

a description of the line item(s) in the statement of comprehensive
income in which hedge ineffectiveness is included.
Fair value hedges

the change in value of the hedged item.
Cash ow hedges
and hedges of a
net investment in a
foreign operation

for hedges of net positions, the hedging gains or losses recognised in a
separate line item in the statement of comprehensive income;

the amount reclassied from the cash ow hedge reserve into prot or
loss as a reclassication adjustment differentiating between amounts for
which hedge accounting had previously been used, but the hedged future
cash ows are no longer expected to occur, and amounts that have been
transferred because the hedged item has affected prot or loss; and

the line item in the statement of comprehensive income affected by the
reclassication adjustment.
ED BC199 Users of nancial statements have informed the IASB that they do not analyse an entitys hedging
activities by type of hedging relationship, e.g. cash ow hedge or fair value hedge. Rather, users want
to understand how an entity manages its risks and the results after hedging. However, to provide
effectively information on the effects of hedge accounting on the nancial statements, the information
should reect the applied accounting treatment, e.g. cash ow hedge accounting or fair value hedge
accounting. The IASB believes that a table prepared by risk category and by type of hedge would
provide sufcient links between the accounting and risk management information.
10.4.4 Reconciliation
ED 52, IAS 1.106 An entity would provide a reconciliation of accumulated other comprehensive income in accordance
with IAS 1, either in the statement of changes in equity or in the notes to the nancial statements, that:

would allow users of the nancial statements to identify the amounts that relate to the disclosures in
10.4.3 for changes in the value of the hedging instrument recognised in other comprehensive income,
the hedging gains or losses recognised in the statement of comprehensive income for hedges of net
positions and the amount reclassied from the cash ow hedge reserve into prot or loss; and

would differentiate between amounts associated with the time value of purchased options that hedge
transaction-related hedged items and amounts associated with the time value of options that hedge
time period-related hedged items when an entity designates as the hedging instrument only the
change in intrinsic value of the option.
ED BC201 Under the proposals, the reconciliation required by IAS 1 would have the same level of detail as the
information that identies the effects of hedge accounting on the statement of comprehensive income.
11. Effective date and transition
ED 53 The effective date for the nal standard resulting from the proposals is for annual periods beginning on
or after 1 January 2013. The nal standard would be applied prospectively and early application would be
permitted.
Observations IASB request for views on effective dates and transition methods
The IASB published in October 2010 a request for views on effective dates and transition methods
for IFRSs expected to be issued in 2011 as well as other new IFRSs. The objective of this request is to
develop an implementation plan to manage the pace and cost of changes to new IFRSs. The result of
this request may impact the effective date and transition method of the ED.

An entity would not be required to present the disclosure requirements in comparative information
provided for periods before initial application of the nal standard
Like the other phases of IFRS 9, the hedge accounting requirements in IFRS 9 may be applied only if all
existing IFRS 9 requirements are adopted at the same time or have already been adopted.
ED 55 Existing hedging relationships that qualify for hedge accounting under IAS 39 would be subject to the
proposed requirements from the adoption date. Hedging relationships that qualify for hedge accounting
in accordance with IAS 39 that also qualify under the nal standard would be regarded as continuing
hedging instruments.
Observations Transition
In addition to applying the proposed requirements to new hedging relationships, entities will have to
apply the proposals to all existing hedging relationships in order for them to be regarded as continuing
hedging relationships. This means that at the time of transition to the new hedge accounting provisions
of IFRS 9, a hedging relationship that met the hedging requirements under IAS39 would also have
to be aligned with the reporting entitys risk management objectives, produce an unbiased result
and minimise ineffectiveness and provide other than an accidental offset. Entities will have to update
their hedge accounting documentation to ensure that any continuing hedging relationships meet the
proposed requirements on the date of initial application.
Observations IASB request for views on effective dates and transition methods
Observations Transition
12. Accounting alternatives to hedge
accounting
ED BC208 One of the functions of hedge accounting is to mitigate the recognition and measurement anomalies
between the accounting for the hedging instrument and the accounting for the hedged item. The IASB
considered two situations in which it could change the recognition and measurement requirements for
items, rather than requiring an entity to mitigate the recognition and measurement anomaly through
hedge accounting.
12.1 Accounting for a contract to buy or sell a non-nancial
item as a derivative
ED BC209, BC210 Under the current guidance, contracts to buy or sell a non-nancial item that can be settled net in cash
are excluded from the scope of IAS 39 if the contracts were entered into and continue to be held for
the purpose of the receipt or delivery of those non-nancial items, which is referred to commonly as the
own-use scope exception in IAS 39, which mostly applies to commodity purchases or sales.
ED BC211 Frequently, if a commodity contract does not meet the own-use scope exception it will be accounted for
as a derivative contract and marked to market through prot or loss. If an entity enters into a derivative
contract to hedge the changes in fair value of the commodity contract, then the derivative will also
be marked to market through prot or loss and therefore the entity does not need to apply hedge
accounting to achieve accounting offset.
ED BC212, BC213 If the contract meets the own-use scope exception, then it is accounted for as a normal purchase
or sales contract, i.e. executory contract. Therefore if an entity enters into a derivative to hedge the
changes in fair value of the executory contract, then there would be an accounting mismatch. To
eliminate this accounting mismatch an entity could apply hedge accounting. However, hedge accounting
in these situations is administratively burdensome because these contracts often are entered into in
large volumes and managed typically on a net basis. In addition, hedge accounting often produces a less
meaningful result than fair value accounting.
ED App C In order to provide relief from the accounting mismatch and to provide more meaningful information
in line with an entitys risk management approach, the IASB decided to amend IAS 32 Financial
Instruments: Presentation. The amendment would change the scope for a contract that was entered
into and continues to be held for the purpose of the receipt or delivery of a non-nancial item in
accordance with the entitys expected purchases, sales or usage requirements. An entity would account
for such a contract that can be settled net in cash or other nancial instruments (including a contract for
a commodity that is readily convertible to cash) as a derivative nancial instrument if that accounting
is in accordance with the entitys underlying business model and how the contracts are managed. That
would be the case for a fair value-based risk management strategy, i.e. the entire business is managed
on a fair value basis and the net exposure is maintained close to nil.
12.2 Hedging credit risk using credit derivatives
ED BC219 Many nancial institutions use frequently credit derivatives to manage their credit risk exposures arising
from their lending activities. For example, hedges of credit risk exposure allow nancial institutions to
transfer the risk of credit loss on a loan or a loan commitment to a third party. This also might reduce the
regulatory capital requirement for the loan or loan commitment, but at the same time allow the nancial
institution to retain nominal ownership of the loan and to preserve the relationship with the client.
Credit portfolio managers use frequently credit derivatives to hedge the credit risk of a proportion of a
particular exposure, e.g. a facility for a particular client, or the banks overall lending portfolio.
ED BC220 However, nancial institutions that manage credit risk using credit derivatives often do not achieve
hedge accounting because it is operationally difcult to isolate and measure the credit risk of a nancial
item as a component that meets the eligibility criteria for hedged items. The spread between the risk-
free rate and the market interest rate incorporates credit risk, liquidity risk, funding risk and any other
unidentied risk component and margin elements. Although it is possible to determine that the spread
includes credit risk, it is operationally difcult to isolate and measure the change in fair value that is
attributable solely to credit risk.
ED BC223 However, when the requirements for hedge accounting are not met, IFRS 9 and IAS 39 permit an entity
to designate as at fair value through prot or loss, at initial recognition, nancial instruments that are
within the scope of the standard if doing so eliminates or reduces signicantly an accounting mismatch.
However, the fair value option has a number of restrictions and limitations. Consequently, most nancial
institutions do not and often cannot elect to apply the fair value option.
ED BC224 As a result, nancial institutions that use credit default swaps to hedge credit risk of their loan portfolios
measure their loan portfolios at amortised cost and do not recognise most loan commitments. The
changes in fair value of the credit default swaps are recognised in prot or loss every period, as for
a trading book. The accounting outcome is a mismatch of gains and losses of the loans and loan
commitments vs those of the credit default swaps, which creates volatility in prot or loss.
ED BC226 The IASB requests input on three alternative approaches to address situations in which credit risk is
hedged by credit derivatives. These alternatives represent three variations on the fair value option model
that include allowing certain loan commitments that ordinarily would not qualify for the fair value option
to do so, allowing an entity exibility in starting and stopping the fair value option, and allowing an entity
to designate a portion of certain items under the fair value option.
13. Alternative view
ED AV1 One of the IASB members dissented from the ED. The member does not believe that the ED would
improve nancial reporting. He believes that many of its provisions are not operational, lack rigour and
would decrease comparability.
ED AV2-AV11 The member is concerned that the ED would allow hedge accounting to become the norm rather than
an exception. The ED relies on risk management as the basis for hedge accounting. The member does
not support relying on risk management as a basis for hedge accounting because it is not dened well
or applied uniformly. He is concerned that policies can be written to permit an entity to move freely in
and out of hedge accounting to manipulate accounting results. He also believes that the effectiveness
assessment proposed in the ED may set the bar for achieving hedge accounting too low and is not
rigorous enough to ensure any level of precision. Further, he is opposed to certain of the proposals
that would expand the current application of hedge accounting, e.g. the method to identify certain risk
components in non-nancial items, hedging aggregate exposures that include derivatives, net position
hedging and allowing non-derivatives that are measured at fair value through prot or loss as hedging
instruments. The member believes that these changes would expand unjustiably hedge accounting,
resulting in free choice to change the normal IFRS recognition and measurement requirements. Also,
he is concerned that accounting for the time value of options when the intrinsic value is designated as a
hedged item is too complex.
ED AV12 The member does not support presenting changes in the value of hedged items in a separate line in the
statement of nancial position since they do not constitute assets or liabilities in their own right. He is
concerned particularly that the ED does not provide any guidance to require the items constituting the
separate line item to be tracked with and linked specically to the hedged items to which they relate.
ED AV12-AV16 The member does not believe that nancial statements users are served well by the ED due to the
reasons stated above. Additionally, he is concerned that little consideration was given to the resulting
operational issues created by the changes required by the ED and that there may be signicant
unintended consequences.
14. FASB proposals and convergence
The FASB issued its comprehensive proposals on nancial instrument accounting in May 2010 with a
comment period that ended in September 2010. In the quarterly progress report published by the IASB
and the FASB (the Boards) on 29 November 2010, the Boards acknowledge that they have diverged on
some important technical issues and that addressing those differences in ways that foster convergence
could affect the envisaged timetables. The FASB will not begin redeliberating hedge accounting until
the second quarter of 2011 and will consider input received on the IASBs exposure draft during its
discussions.
Signicant differences between the two sets of proposals include:
IASB proposed model FASB proposed model
Approach Comprehensive review led to
fundamental change.
Keeps most of current
provisions in place with several
key changes.
Scope Does not address hedges of
open portfolios or fair value
hedges of a portfolio for
interest rate risk (macro hedge).
Includes all hedging
relationships.
Non-derivative nancial
instruments designated as
hedging instruments for foreign
currency risk
Permitted under all hedging
models.
Permitted for a hedge of a
net investment in a foreign
operation and a fair value hedge
of a rm commitment.
Non-derivative nancial
instruments measured at
fair value through prot or
loss (fair value through net
income) designated as hedging
instruments for risks other than
foreign currency
Permitted. Prohibited.
Allowable hedged risk
components for nancial
instruments
Risk component must be
separately identiable and
reliably measureable; and can
be either contractually or non-
contractually specied, as well
as a combination of such risk
components.
Benchmark interest rate risk,
foreign currency risk, and credit
risk, as well as a combination of
these risks.
Allowable hedged risk
components for non-nancial
items
Same as those for nancial
instruments above.
Entire risk only and foreign
currency risk.
Fair value hedge of a layer
component
Permitted if certain criteria are
met.
Prohibited.
Effectiveness assessment
requirement
Must produce an unbiased
result, minimise expected
ineffectiveness and be
expected to achieve other than
accidental offsetting.
Reasonably effective.
Frequency of effectiveness
assessment
At a minimum each reporting
period or upon a signicant
change in the circumstances
affecting the hedge
effectiveness requirements,
whichever comes rst.
Reassessment would be
required only if circumstances
suggest that the hedging
relationship may no longer be
reasonably effective.
Assumption of perfective
effectiveness
Prohibited. Prohibited.
Fair value hedge accounting Change in full fair value of
the hedging instrument and
change in value of hedged
item attributable to the hedged
risk would be recognised and
offset in other comprehensive
income with any ineffectiveness
transferred to prot or loss.
Change in full fair value of
the hedging instrument and
change in value of hedged item
attributable to the hedged risk
would be recognised in earnings
directly.
Fair value hedge hedged item
value changes
The change in fair value of
hedged item attributable to
the hedged risk would be
recognised in a separate
line item in the statement of
nancial position rather than
adjusting the hedged item.
The change in fair value of
hedged item attributable to the
hedged risk would adjust the
hedged item in the statement of
nancial position.
Cash ow hedge accounting The effective portion of the
gain or loss on the hedging
instrument would accumulate in
other comprehensive income;
the effective portion would be
the lower of the cumulative
change in fair value of the
hedging instrument and the
cumulative change in fair value
of the hedged item.
The effective portion of the
gain or loss on the hedging
instrument would accumulate in
other comprehensive income;
the ineffective portion would
be the difference between the
cumulative change in fair value
of the hedging instrument and
the cumulative change in fair
value of the hedged item.
Forecasted transaction that was
the hedged item in a cash ow
hedge that subsequently results
in recognising a non-nancial
asset/liability (or a forecast
transaction for a non-nancial
item that becomes a rm
commitment for which fair value
hedge accounting is applied)
Upon recognition of the non-
nancial asset/liability (or
the forecast transaction for a
non-nancial item becoming
a rm commitment for which
fair value hedge accounting is
applied), the amount of the gain
or loss that was accumulated in
other comprehensive income
as part of the cash ow hedge
accounting would be removed
from other comprehensive
income and added to the
original carrying amount of the
non-nancial asset/liability.
The amount of the gain or
loss that was accumulated
in other comprehensive
income as part of the cash
ow hedge accounting would
remain in accumulated other
comprehensive income and
would be reclassied to
earnings as the non-nancial
item affects earnings.
Rebalancing a hedging
relationship voluntarily with
continuation of relationship
An entity may rebalance
proactively based on
expectations.
Rebalancing would cause
hedge accounting to
discontinue.
Mandatory rebalancing of
a hedging relationship with
continuation of relationship
An entity would be required
to rebalance when the
hedging relationship fails the
effectiveness assessment but
the entitys risk management
strategy remains the same.
Rebalancing would never be
mandatory.
Voluntarily discontinuing hedge
accounting
Prohibited. Prohibited; however, an entity
can effectively terminate a
hedging derivative by meeting
certain criteria.
Change in risk management
strategy triggers discontinuing
hedge accounting
Yes. No.
Accounting for the time
value of an option when the
intrinsic value of the option
is designated as a hedging
instrument
Changes in fair value of the
time value would be recognised
in other comprehensive income
based on the time value of
an option with critical terms
that align with the hedged
item. Amounts in equity would
be reclassied to prot or
loss, or recognised as basis
adjustments, but the manner
would depend upon whether
the hedged item is transaction
related or period related.
The time value would be
treated as a freestanding
derivative; however, if total
changes in the options cash
ows are designated as the
hedging instrument, then the
changes in fair value of the
time value would be recognised
in other comprehensive
income. These amounts would
be reclassied from other
comprehensive income to
earnings during the term of the
hedge relationship.
Hedging gross positions Permitted if certain criteria
are met. They do not include
approximately proportional
criteria.
The individual items within
the group must have similar
risk characteristics and the
change in the fair value
attributable to the hedged risk
for each individual item in the
group must be approximately
proportional to the overall
change in the fair value of the
group for the hedged risk.
Hedging net positions Permitted if certain criteria are
met.
Prohibited.
Hedging nil net positions
without a hedging derivative
instrument
met.
Prohibited.
Synthetic position being the
hedged item, e.g. a foreign
currency denominated xed
rate debt and a xed to
oating cross-currency interest
rate swap designated as a
synthetic domestic currency
denominated oating rate debt
met.
Prohibited.
15. Project timeline
The IASB has invited comments on the proposals contained in theED by 9 March 2011. The nal
standard currently is scheduled to be published in the second quarter of 2011.
The IASB will continue to deliberate the portfolio hedging model and an exposure draft currently is
expected to be published in the second quarter of 2011; with a nal standard in the fourth quarter of
2011.
The FASB published an exposure draft containing its comprehensive proposals on nancial instruments
accounting in May 2010.
About this publication
This publication has been produced by the KPMG International Standards Group (part of KPMG IFRG Limited).
Content
Our New on the Horizon publications are prepared upon the release of a new proposed IFRS or proposed amendment(s) to the
requirements of existing IFRSs. They include a discussion of the key elements of the new proposals and highlight areas that
may result in a change of practice.
This edition of New on the Horizon considers the proposed requirements of ED/2010/13 Hedge Accounting (the ED).
The text of this publication is referenced to the ED and to selected other current IFRSs in issue at 9 December 2010.
References in the left-hand margin identify the relevant paragraphs.
Further analysis and interpretation will be needed in order for an entity to consider the potential impact of this ED in light of the
entitys own facts, circumstances and individual transactions. The information contained in this publication is based on initial
observations developed by the KPMG International Standards Group, and these observations may change.
Abbreviations
IASB: International Accounting Standards Board
FASB: US Financial Accounting Standards Board
G20: Group of Twenty
Other ways KPMG member rms professionals can help
A more detailed discussion of the general accounting issues that arise from the application of IFRSs can be found in our
publication Insights into IFRS.
In addition to Insights into IFRS, we have a range of publications that can assist you further, including:

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Acknowledgements
We would like to acknowledge the efforts of the principal authors of this publication.
The authors include Ross Collins and Enrique Tejerina of the KPMG International
Standards Group and Mike Gaiso of KPMG in the US.
We would also like to thank the contributions made by other reviewers, which
include other members of the Financial Instruments Topic Team:
Marco Andre Almeida KPMG in Brazil
Ewa Bialkowska KPMG in the UK
Ana Cortez KPMG in Hong Kong
Jean-Francois Dande KPMG in France
Terry Harding KPMG in the UK
Gale Kelly KPMG in Canada
Agnes Lutukai KPMG in South Africa
Marina Malyutina KPMG in Russia
Chris Spall KPMG in the UK
Patricia Stebbens KPMG in Australia
Andrew Vials KPMG in the UK
Venkataramanan Vishwanath KPMG in India
Danny Vitan KPMG in Israel
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Publication name: New on the Horizon: Hedge accounting
Publication number: 317728
Publication date: January 2011
KPMG International Standards Group is part of KPMG IFRG Limited.
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independent rms operating under the KPMG name. KPMG International provides no audit or other client services. Such services
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
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